China P&C Insurance and Reinsurance Market Report

Transcription

1 China P&C Insurance and Reinsurance Market Report September 2013 Empower Results

2 Contents 3 Foreword 4 Executive Summary 5 Insurance Market Overview 16 Reinsurance Market Overview 50 Appendices 56 Glossary 58 Contact Information 59 About Aon Benfield 21 Lines of Business 39 Regulation and Capitalisation 42 Market Dynamics 46 Foreign Investment and International Expansion

3 Aon Benfield Foreword Over the past ten years, China has emerged as an insurance and reinsurance market that cannot be overlooked. This, however, does not mean it is well analyzed. When we look beyond the macro growth, underlying opportunities and challenges are not necessarily what they first appear to be. For example, a detailed analysis of the Property market shows that growth has been more in line with GDP than with the faster overall market growth, which is largely driven by Motor business. This report is not just a collection of statistics but offers the unique perspective of a global industry leader. It attempts to examine the Chinese insurance and reinsurance markets from various angles to assist in revealing many of the opportunities and challenges vital for any insurer or reinsurer forming a strategy for China. Amongst other things, it explores reasons for the slow development of catastrophe insurance and reinsurance in China against a backdrop of rising accumulation exposure to natural hazards. Despite its rapid expansion in the past few years, the Chinese insurance industry will continue to face major challenges in the years to come. While many of the challenges that the Chinese market faces are not particularly new, we have to acknowledge their complexity. They are amplified by the scale of the market and the speed of its development. Nonetheless, expertise and experience accumulated and tested in the global market is still of much relevance to China. Aon Benfield is committed to the Chinese market and strives to bring global expertise and capacity to facilitate the development of our clients and the general market. We are fortunate to have witnessed extremely exciting developments in the past ten years. However, in my view, the more exciting momentum is yet to come in the next ten years. Hopefully this report will provide you with a few insights into that exciting future. Malcolm Steingold CEO Asia Pacific Aon Benfield 3

4 China P&C Insurance and Reinsurance Market Report Executive Summary From 2001 to 2012, China was one of the fastest growing insurance markets in the world and now at 1.58t RMB (249b USD, Life and P&C) represents 5.5% of the world s total insurance premiums (up from c. 1% in 2001). Looking ahead, the China Insurance Regulatory Commission s (CIRC) 12th five year plan targets insurance premiums of 3t RMB (467b USD) in 2015, implying a c. 24% CAGR. The Chinese P&C market outpaced GDP expansion for the past decade through 2012, growing to 533b RMB (85.5b USD), a 19.2% CAGR. However, underlying penetration levels remain low by international standards. After 37% growth in 2010 (on the back of tax-driven growth in Motor), the P&C market has moderated in 2011 and 2012, with 14.9% and 15.4% growth rate respectively. Current headwinds include rising inflation and slowing vehicle sales. However, some areas of the market continue to expand aggressively. Government subsidies have supported annual growth in Agriculture premiums of greater than 100% from 2005 to 2011, to reach 17.4b RMB (2.8b USD). In the reinsurance market, aggregate premiums ceded by Chinese P&C insurers in 2011 were c.79.3b RMB (12.6b USD), having expanded by 200% since Around 85% of Chinese reinsurance business is written through Treaty contracts and c. 70% of premiums are assumed by local reinsurance operations. In terms of perils China has broad exposure, having suffered five of the top 10 deadliest natural disasters in history, three of the top five deadliest Earthquakes, the top five deadliest Floods and more Typhoons than any other country (an average of approximately 11 per annum). In recent history, catastrophes have affected over 70% of China s land area and over half the population. The CIRC s 12 th five year plan covers construction of a national natural disaster risk transfer program as well as improvement of loss models and underlying data. Finally, the evolution of Chinese insurance regulation is bringing the market closer to international best practice. Over time this should support increased transparency and improved profitability, potentially hand in hand with the entrance of more foreign insurers and reinsurers into the Chinese market and the global expansion of Chinese insurers and reinsurers. 4

5 Aon Benfield Insurance Market Overview Growth Over the decade to 2010, China s total Gross Domestic Product (GDP) has expanded at a Compound Annual Growth Rate (CAGR) of 17.2% (5 year CAGR to 2010 of 21.1%), elevating the Chinese economy to be the world s second largest. After posting GDP growth of 17.8% (CAGR) in 2011, the pace of expansion has moderated to 9.8% in 2012, largely on the back of government moves to raise interest rates and tighten bank lending but also in part reflecting global economic headwinds. In 2013, second quarter GDP growth was 7.6%, down from 7.7% in Q1 and 7.8% in Q The Chinese Government appears to be focused on rebalancing economic growth away from the historical drivers of exports and fixed asset investment and towards consumption. Figure 1: China s Non-Life Insurance Growth versus GDP Growth Growth 40% 35% 30% 25% 20% 15% 10% 5% 0% Annual Non-Life Insurance Growth Sources: CIRC, World Bank, Inpoint Annual GDP Growth Over the years from 2001 to 2010, the Chinese insurance market (P&C and Life) was the second fastest growing national market in the world (behind Malta) and now represents close to 4% of the world s total insurance premiums (up from c. 1% in 2001). Given the still low insurance penetration rate and China s comparative economic outlook, this share can only be expected to grow. The Chinese Property & Casualty (P&C) market has outpaced economic expansion over the last decade. P&C insurance premiums have grown from 64b RMB in 2000 to 533b RMB (85.5b USD) in 2012, a CAGR of 19.3% for the last decade. This includes Personal Accident & Health (PA & H) written by P&C insurers but excludes all premiums written by Life insurers. Figure 2: Total P&C Insurance Premiums 550b Motor Non-Motor PA & H P&C Total P&C Market Growth 50% RMB 500b 450b 400b 350b 300b 250b B 45% 40% 35% 30% 25% Growth 200b 150b 100b 50b 20% 15% 10% 0b % * Jan - Aug No line of business split available Sources: CIRC, The 2012 Yearbook of China s Insurance, Inpoint 5

6 China P&C Insurance and Reinsurance Market Report Historically, growth in the Chinese insurance market has been underpinned by Motor lines, which accounted for 76% of total P&C insurance premiums in Other than Motor lines, Agricultural insurance has been the other main focus. The second largest premium line, Property, has seen more modest growth. Figure 3: P&C Insurance Premium Split 7% 5% 4% 3% 4% 3% 2% 2% 3% 3% Motor Property 73% Sources: The 2012 Yearbook of China s Insurance, Inpoint 76% Other Agriculture MAT Credit & Surety Liability PA & H After growing by 37% in 2010 (largely on the back of a tax-driven spurt in motor vehicle sales), the Chinese P&C market has moderated in Through the first eight months of 2011, Chinese P&C insurance premiums excluding PA & H tallied 318b RMB (48.8b USD), up 13% on the same period in This was a slight decrease on the performance for the six months to June 2011, that saw 16% growth in P&C premiums. The CIRC Chairman, Mr Wu Dingfu, has indicated that the Chinese insurance industry will continue to face challenges for the remainder of 2011, including rising inflation, higher interest rates, low yields of some insurance products and the impact of slower vehicle sales. Figure 4: Chinese Insurance Premiums GWP RMB (b) Growth (to 2010) LoB yr CAGR 5 yr CAGR Motor % 12.1% Property % 5.5% Agriculture % 29.8% MAT % 8.5% Liability % 8.5% PA & H % 7.0% Other % 5.2% % 25.7% Sources: CIRC, The 2012 Yearbook of China s Insurance, Inpoint Between 2003 and 2010, Chinese premium per capita grew almost fivefold, whereas the premium spent in developed countries remained relatively stable. In 2010, the average insurance spend per capita in China was 361 RMB (53 USD) compared to the average spend of 5,032 RMB (739 USD) in Europe. Figure 5: Premium Per Capita Growth (base 100 in 2003) Factor Sources: Swiss Re, Inpoint China U.S. Japan Germany China s Non-Life insurance penetration as a percentage of GDP only achieved a slight uptick in 2009 and 2010, to 1.1% and 1.3% respectively. In comparison, Germany fluctuated under 4% and the US fell from over 5% to 4.5% While the potential is clear, headwinds to increased insurance penetration remain. Private insurable asset ownership is currently limited in China. Personal savings rates are high and continue to rise while personal income as a component of GDP is retreating. Cultural shifts will be required to realise materially higher penetration. 6

7 Aon Benfield Figure 6: P&C Insurance Penetration as % of GDP Penetration 6% 5% 4% 3% 2% 1% 0% Sources: Swiss Re, Inpoint China U.S. Japan Germany While not the focus of this report, over the last decade total Chinese Life insurance premiums have grown from 98b RMB (11.9b USD) in 2000 to 1,051b RMB (154b USD) in 2010, a CAGR of 26.7%. Life business for the eight months to August 2011 decreased by 5%, driven by restrictions on bancassurance business and the effect of the global economic environment. It is worth noting that over this time, total PA & H premiums grew by 7%. Around 13% of Chinese PA & H business is written by P&C insurers. Profitability Company and industry data released by the China Insurance Regulatory Commission (CIRC) was a key information source underpinning our analysis of the Chinese insurance and reinsurance markets. It is important to note that it is our understanding that Loss information released by the CIRC is typically on a gross and paid basis. On that basis, as a proxy for loss performance, we have compared aggregated premiums and claims reported to CIRC by Chinese P&C insurers since Figure 7: Total P&C Insurance Premiums RMB 600m 500m 400m 300m 200m Premiums Claims Ratio % 60% 55% 50% 45% CR We have also collated Combined Ratios for the top three Chinese Property & Casualty insurers. Given each of these entities have premiums dominated by largely homogenous Motor lines, it is no surprise that the variation between companies is minor. These ratios have been calculated on net earned premiums and net claims incurred from the companies respective financial reports. Figure 8: Performance Ratios Loss Ratio Year PICC Ping An China Pacific % 68.1% 64.9% % 57.0% 61.0% % 55.4% 57.4% % 57.8% 58.6% % 59.4% 61.2% Expense Ratio Year PICC Ping An China Pacific % 35.9% 37.3% % 41.6% 36.5% % 37.8% 36.3% % 35.7% 34.5% % 35.9% 34.6% Combined Ratio Year PICC Ping An China Pacific % 104.0% 102.2% % 98.6% 97.5% % 93.2% 93.7% % 93.5% 93.1% % 95.3% 95.8% Sources: Company accounts, Inpoint Geographic Spread 100m 0m Note: CR s compare gross premiums and paid claims Sources: CIRC, The 2012 Yearbook of China s Insurance, Inpoint 40% 35% Domestic insurance premiums are concentrated in the highly industrialized and prosperous Southeast region of the country, otherwise known as the Pearl Delta. 7

8 China P&C Insurance and Reinsurance Market Report Figure 9: Chinese P&C Insurance Market by Region (Excl. PA & H) 12 Months to December Months to June 2013 Rank Region GWP RMB(m) GWP USD(m) Market share GWP RMB(m) GWP USD(m) Market share(%) 1 Jiangsu 44,092 7, ,765 4, Guangdong 41,680 6, ,547 3, Zhejiang 35,822 5, ,275 3, Shandong 31,762 5, ,917 2, Hebei 25,865 4, ,336 2, Shanghai 25,638 4, ,276 2, Sichuan 27,151 4, ,224 2, Beijing 26,702 4, ,213 2, Henan 19,577 3, ,942 1, Anhui 16,906 2, ,772 1, Hunan 14,496 2, ,072 1, Hubei 13,525 2, ,670 1, Shenzhen 15,451 2, ,403 1, Liaoning 14,324 2, ,366 1, Fujian 13,377 2, ,985 1, Yunnan 12,354 1, ,782 1, Shanxi 12,779 2, ,641 1, Xinjiang 9,368 1, ,254 1, Inner Mongolia 11,984 1, ,950 1, Shaanxi 11,578 1, ,945 1, Heilongjiang 9,925 1, ,894 1, Jiangxi 9,749 1, , Guangxi 9,225 1, , Chongqing 9,520 1, , Tianjin 9,079 1, , Jilin 7,811 1, , Ningbo 8,623 1, , Guizhou 7,039 1, , Gansu 5, , Qingdao 6,493 1, , Dalian 5, , Xiamen 4, , Hainan 2, , Ningxia 2, , Qinghai 1, Tibet Other 8,256 1, , ,093 85, ,666 50,943 Exchange Rate: RMB:USD= (31 Dec 2012) Exchange Rate: RMB:USD= (28 June 2013) Sources: CIRC 8

9 Aon Benfield Figure 10: China GWP by Province Heilongjiang Inner Mongolia Jilin Xinjiang Hebei Liaoning Gansu Beijing Hainin Year 2010 (in RMB million) 23,000 to 32,000 Qinghai Ningxia Shanxi Shandong 16,000 to 23,000 9,000 to 16,000 3,000 to 9,000 Xizang Shaanxi Henan Jiangsu 400 to 3,000 Sichuan Chongqing Hubei Hunan Shanghai Anhui Zhejiang Jiangxi Guizhou Fujian Yunnan Guangxi Guangdong Hainan Sources: Aon Benfield, Inpoint International experience suggests that when per capita GDP is between 5k-10k USD (32k-64k RMB), the growth rate of insurance premiums will exceed that of GDP. Ten provinces in China currently fit this description, highlighting the potential for insurance premium growth within these regions. Of the remaining regions, there is potential for the further development of micro insurance products. In 2008, the CIRC became a member of the International Association of Insurance Supervisors and Consultative Group to Assist the Poor micro insurance working group and began to promote micro insurance in China with the implementation of a micro insurance scheme. In the same year, total Gross Written Premium (GWP) from rural counties accounted for 30.6% of the total national GWP, and farmer s annual average net income was 4,761 RMB (742 USD). By 2009, micro insurance premiums totaled 270m RMB (39.6m USD), and by 2011, China Pacific, Ping An, New China Life, Taikang, China United and Anxin had all launched micro insurance businesses including Life, PA & H, Agriculture and Property products. It is expected that this will be an area of focus moving forward and it has already started to gather momentum, albeit from a small base. 9

10 China P&C Insurance and Reinsurance Market Report Figure 11: Economic Indicators by Region for the 12 months to December 2012 Region GDP RMB(m) GDP USD(m) Population(m) Per Capita GDP(m) 2012 GDP Growth Rate Tianjin 1,288, , , % Shanghai 2,010, , , % Beijing 1,780, , , % Jiangsu 5,405, , , % Zhejiang 3,460, , , % Inner Mongolia 1,598, , , % Guangdong 5,706, , , % Liaoning 2,480, , , % Fujian 1,970, , , % Shandong 5,001, , , % Jilin 1,193, , , % Chongqing 1,145, , , % Hubei 2,225, , , % Hebei 2,657, , , % Shaanxi 1,445, , , % Ningxia 232,700 37, , % Heilongjiang 1,369, , , % Shanxi 1,211, , , % Xinjiang 753, , , % Hunan 2,215, , , % Hainan 285,500 45, , % Qinghai 188,400 30, , % Henan 3,000, , , % Sichuan 2,385, , , % Jiangxi 1,294, , , % Guangxi 1,303, , , % Anhui 1,721, , , % Tibet 70,100 11, , % Gansu 556,900 89, , % Yunnan 1,031, , , % Guizhou 680, , , % Exchange Rate: RMB:USD= (31 Dec 2012) Sources: National Bureau of Statistics of China 10

11 Aon Benfield Concentration The Chinese P&C market is extremely concentrated. PICC, Ping An, CPIC and China United wrote close to 70% of Chinese Non-Life insurance business in 2012, which was consistent with the six months to June Figure 12: Chinese P&C Insurance Market by Company Rank Company Name Domestic/ Foreign GWP RMB(m) 12 Months to December Months to June 2013 GWP USD(m) Market share GWP RMB(m) GWP USD(m) 1 PICC D 193,018 30, % 115,341 18, % 2 Ping An Property Ins. D 98,786 15, % 53,744 8, % 3 CPIC (China Pacific) D 69,550 11, % 42,307 6, % 4 China United Property D 24,556 3, % 16,300 2, % 5 China Life Property & Casualty D 23,542 3, % 15,885 2, % 6 CICC (China Continent P&C) D 17,902 2, % 9,879 1, % 7 Sunshine Property & Casualty D 14,660 2, % 8,093 1, % 8 China Export Credit Ins. Corp. D 14,260 2, % 5, % 9 Tian An Ins. Co. Ltd. D 8,127 1, % 4, % 10 Tai Ping Property Ins. D 7,768 1, % 5, % 11 An Bong D 7,064 1, % 3, % 12 Yong An Property Ins. Co. D 7,025 1, % 3, % 13 Sinosafe General In. Co. Ltd. D 5, % 3, % 14 Huatai Ins. Co. of China D 5, % 3, % 15 All Trust Insurance Co. Ltd. D 5, % 3, % 16 Yingda P&C D 5, % 4, % 17 Tian Ping Car Ins. D 4, % 2, % 18 Bank Of China Ins. D 4, % 2, % 19 Dubon P&C Ins. (All State) D 3, % 1, % 20 Cinda P&C Ins. D 2, % 1, % 21 Anhua Agro Ins. D 2, % 1, % 22 Zking P&C Ins. D 2, % 1, % 23 Zheshang P&C Ins. D 2, % 1, % 24 Sunlight Agricultural Mutual Ins. Co. D 2, % 2, % 25 Ming An Insurance Co. Ltd. D 2, % 1, % 26 Guo Yuan Agricultural Ins. D 1, % % 27 Chang An D 1, % 1, % 28 Dazhong Ins. Co. Ltd. D 1, % % 29 Bohai Property D 1, % % 30 Dinghe Ins. D 1, % 1, % 31 An Cheng P&C Ins. D 1, % % 32 AIG F 1, % % 33 Shanghai Anxin D % % 34 Liberty Mutual Chongqing F % % 35 Groupama Ins. F % % 36 Allianz F % % 37 Samsung Fire F % % 38 Jintai D % % Market share 11

12 China P&C Insurance and Reinsurance Market Report Rank Company Name Domestic/ Foreign GWP RMB(m) 12 Months to December Months to June 2013 GWP USD(m) Market share GWP RMB(m) GWP USD(m) 39 Tokyo Marine Shanghai F % % 40 Mitsui Sumitomo F % % 41 Taishan P&C Insurance D % % 42 Huanong P&C Ins. D % % 43 Zurich Ins. F % % 44 Sompo Japan Insurance F % % 45 Cathay Property F % % 46 Winterthur Shanghai F % % 47 Urtrust D % % 48 Generali P&C Ins. F % % 49 China Coal D % % 50 Fubon Insurance F % % 51 Royal & Sun Shanghai F % % 52 Chubb Shanghai F % % 53 Chang Jiang D % % 54 Hyundai P&C Ins. F % % 55 LIG P&C Ins. F % % 56 Aioi F % % 57 Nipponkoa F % % 58 Champion D % % 59 XL Insurance F % % 60 Sanguard D % % 61 China Reliable D % % 62 Lloyd's F % % 552,988 88, ,882 53,249 Market share Exchange Rate: RMB:USD= (31 Dec 2012) Exchange Rate: RMB:USD= (28 June 2013) Sources: CIRC Despite the consistency of the top four domestic insurers between 2010 and 2011, the few years preceding this show another side to the evolving domestic insurance market. In 2005, the four leading insurers accounted for over 80% of the market. PICC in particular has dropped from a market share of almost 51% in 2005 to just over 37% in For Liability lines, PICC dropped c. 7% market share between 2009 and 2010 alone. This migration in market share has been underpinned by price competition, increasing pressure on many insurers financial positions. In an attempt to increase regulatory alignment with more developed insurance Figure 13: Market Share Movements over Time 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% PICC Ping An China Paci China United Others Sources: The 2012 Yearbook of China s Insurance, Inpoint markets, the CIRC has initiated a series of measures to improve the solvency of domestic insurers. However, implemented changes have been incremental to date. 12

13 Aon Benfield Distribution Direct According to the CIRC, most Chinese insurance business is transacted on a direct basis for large Commercial accounts, as well as most Personal lines. The direct channel has broadened in recent years to include telemarketing and e-commerce platforms. Bancassurance is another channel experiencing growth. The CIRC s 12 th five year plan specifically mentions an intention to increase regulation on sales from telephone, internet and other newly created sales channels in order to prevent anti-competitive behavior. Figure 14: Insurance Distribution Channels (2010) 24% 47% Agents Agency Co. Brokers Telemarketing Loss Adjusters Other premiums. Ping An has had great success distributing its Motor products in particular through telemarketing. PICC created its own telemarketing platform in 2009 and one year later the platform had contributed c. 3b RMB (0.4b USD) to total company premiums, or c. 2%-3%. PICC intends to continue to expand its telemarketing platform to become a major revenue generator for the business, as demonstrated by the addition of a third call center in Beijing recently. E-Commerce China leads the world in terms of internet users. In 2010 there were over 457 Million internet users in China, concentrated in Beijing, Shanghai and Guangzhou. Of this, 450m had access to broadband and 66% had access through mobile devices. Internet penetration in 2010 was 34%, higher than the world average, and although China remains predominantly a cash society, credit card use is accelerating rapidly. Figure 15: Chinese Internet Users 500m Internet Users Internet Penetration Rate 50% 3% 400m 40% 6% 9% Users 300m 200m 30% 20% Penetration 11% 100m 10% Sources: CIRC, Inpoint Telemarketing Under current regulations it is not possible to obtain a nationwide telemarketing license. As a result, insurers are establishing separate provincial call centers wherever they have an insurance license and are rejecting calls from outside their designated business areas. Despite these geographical restrictions, telemarketing is anticipated to one of the fastest growing distribution channels for P&C insurance in coming years. For the six months to June 2011, national telemarketing premiums totaled 18b RMB (2.7b USD), equivalent to the entire 2010 premiums from the channel. The channel is dominated by the leading insurers and Ping An has been the market leader since In 2010 it sold 12b RMB (1.8b USD) of P&C premiums via telemarketing, with year on year growth of c. 180%. This was equivalent to c. 20% of its total P&C 0m Sources: China Internet Watch, Inpoint Although data for this channel is yet to be published specifically for the insurance industry, several large insurers have fully interactive websites for Personal lines like Travel and Personal Accident providing quotes, payment of premiums and claims notifications. Premiums are typically discounted by up to 15% compared to agency premiums. Motor insurance has proven the easiest Line of business to sell through this channel. The CIRC have issued draft guidelines on internet sales which mandate that only insurers and insurance brokers may conduct business through this medium. Additionally, these companies must have a CIRC business license and satisfactory management control systems for their internet operations. As a result, some insurers have been unable to secure the CIRC s permission for internet selling. 0% 13

14 China P&C Insurance and Reinsurance Market Report Bancassurance In October 2010, the China Banking Regulatory Commission issued a notice which impacted insurers ability to distribute insurance products through the bancassurance channel. It restricted each bank branch to three insurance product providers and banned Life agents from bank branches altogether. In order to protect market share, insurers have responded in a number of ways. Some have sought to become financial conglomerates, others have undergone a reweighting towards the agency channel. Others have attempted to convert agents into bank staff, similar to the Prudential UK and Standard Chartered Bank model in Hong Kong. Although there is opportunity for banks to increase market share, in some cases this will be subject to securing insurance licenses from the CIRC, sub-scale policy administration capacity and the incremental capital demands of writing insurance business. As of March 2011, six banks were in the process of acquiring majority stakes in insurers. As Life business is much more prevalent through the bancassurance channel, these changes are more likely to affect Life insurance business. China Taiping and China Pacific have the largest exposure to the bancassurance channel at 40% and 25% respectively, compared with China Life (10%) and Ping An (under 5%). Bancassurance in China is generally perceived to offer lower margin business. The number of branches and postal offices selling bancassurance products reached 138,477 in December 2010 (113,632 bank branches and 24,845 postal offices), up c. 30% from June For the nine months to September 2010, premium income for Life and P&C markets stood at 392b RMB (58.9b USD) (320b RMB (48b USD) from bank branches and 72b RMB (10.8b USD) from postal offices), up 41% compared with the same period in This accounted for c. 35% of total (Life and Non-Life) premiums. Agency Companies and Agents In the 12 months to December 2010, agency companies contributed 48.2b RMB (7.1b USD) premiums, an increase year on year of 46.5%. The P&C portion totaled 34.3b RMB (5.0b USD) (71%) and Life 13.9b RMB (2.0b USD) (29%). This represented 8.8% of national P&C premiums and 1.3% of Life premiums. For the six months to June 2011, agency companies contributed 39.2b RMB (6.0b USD) premiums, an increase year on year of c. 66%. Of this, P&C was 25b RMB (3.8b USD) and Life was 14.2b RMB (2.2b USD). This accounted for 10.6% of P&C premiums and 2.5% of Life premiums. In September 2010, the number of insurance agents in the Chinese market reached 3,146,450, up 122,838 from June 2010, however only c.11% of these were Non-Life agents. Premiums generated by agents for the nine months to September 2010 totaled 386b RMB (58b USD), an increase of 9% compared with the same period in This included c. 278b RMB (42b USD) of Life premium income and c. 106b RMB (16b USD) of Non-Life premium income, accounting for 37% and 36% of national Life and Non-Life premiums respectively. The CIRC s 15% limit on commissions had a negative impact on the agency channel, particularly Motor agents. Previously charging commissions up to 35%, agents had greater leverage to offer more competitive net premiums. The new ceiling has constricted their ability to compete. The agency channel is generally perceived to be inefficient and expensive. Brokers Many brokers are state-owned and only place business for their parent group. Others offer limited technical services or handle only Motor business. At this point, brokers are not materially involved in Personal lines or Agriculture but it is estimated that brokers hold a c. 15% market share in Commercial lines. The broker channel is fragmented with 392 insurance brokers reported as at December 2010, however the top 10 brokers account for c. 50% of broked business. 14

15 Aon Benfield Top 10 Insurance Brokers in China (6 Months to June 2011) Insurance Broker 2011 Market Share of Broked Business Chang an Insurance Brokers Co Ltd 12.8% Beijing Union Insurance Brokers Co Ltd 3.9% Jiang Tai Insurance Brokers Co Ltd 5.1% AON COFCO Insurance Brokers Co Ltd 5.5% Willis Insurance Brokers Co Ltd 3.8% Marsh (Beijing) Insurance Brokers Co Ltd 3.4% Jinsheng Insurance Brokers Co Ltd 3.3% Huatai Insurance Consultancy Service Ltd 2.5% Zhongsheng Int. (PICC & Tokio Marine JV) 2.0% China Insurance Brokers Co Ltd 2.0% Sources: CIRC, Inpoint Insurance brokers are authorized to conduct business nationally. Operating licenses are granted for a period of three years and are subject to renewal by the CIRC. To qualify, a foreign broker must have 30 consecutive years of operating history and have had a representative office in China for at least two years. Foreign brokers are only allowed to handle large-scale Commercial risks, for example enterprises with an asset value over 150m RMB (23m USD) and an annual premium over 400k RMB (62k USD). Foreign brokers are experiencing challenges penetrating the domestic insurance market, partly because the largest Chinese corporations often have their own in-house brokers and typically only turn to international brokers for a limited range of specialist classes. As a result, foreign brokers tend to focus on servicing multinational clients. There are approximately 10 foreign-invested insurance brokers in China and their market share is a combined c. 15%. In the 12 months to December 2012, premiums placed by brokers reached 42.1b RMB, a year-on-year increase of 10.8%. The P&C portion totaled 34.0b RMB (5.5b USD) and Life was 6.5b RMB (1.0b USD). This accounted for 6.4% of P&C premiums and 0.6% of Life premiums to December

16 China P&C Insurance and Reinsurance Market Report Reinsurance Market Overview Growth Sourcing accurate and detailed data for the Chinese reinsurance market is challenging. The CIRC issued a directive in 2010 that P&C insurers report relevant reinsurance information to the CIRC on a quarterly basis. Our analysis is primarily based on the CIRC s data, complimented by company financial statements where available. Figure 17: P&C Insurance and Reinsurance: Premiums & Growth RMB 600m Insurance Retained Ceded RI Growth 80% 70% 500m 60% 50% 400m 40% 300m 30% 20% 200m 10% 0% 100m -10% -20% 0m -30% Sources: The 2012 Yearbook of China s Insurance, Inpoint Aggregate premiums ceded by Chinese P&C insurers in 2011 totaled c. 79b RMB (12.7b USD), up from 44b RMB (6.5b USD) in Aggregate annual premiums ceded by Chinese P&C insurers have expanded by 67% since However, 2008 saw ceded premiums jump to c. 52b RMB (7.5b USD), up 34% on This was driven by a material increase in premiums ceded by PICC Property and Casualty (to c. 23b RMB (3.3b USD) from c. 13b RMB (1.7b USD). PICC wound back ceded premiums in 2009, contributing to a 26% contraction in aggregate reinsurance premiums ceded by Chinese P&C insurers. Figure 18: Insurer Market Share versus Cession Ratio 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% >5% 0% 0% 1% 2% 3% 4% 5% Cessation Ratio Market Share Weighted Average Cession Ratio: 10.7% (2010) Sources: The 2011 Yearbook of China s Insurance, Inpoint Growth Around 85% of Chinese reinsurance business was written through Treaty contracts in 2010, down from 87% in 2009 and 89% in The majority of Treaty programs are written on a quota share basis. Chinese cedents prefer this method as it provides them with immediate solvency relief. However, Excess of Loss (XoL) programs are gradually becoming more common. Facultative business is done via additional channels to those which are typical in more developed insurance markets. One such way to write Facultative business is for second and third tier Chinese insurer syndicates to provide capacity to the leading domestic insurers. This provides the mid-tier insurers with access to premiums and risks they would not otherwise be able to write. Additionally, some branches of local insurers transfer risks on a Facultative basis through coinsurance with other local insurers. Onshore Business Over the last three years, c. 70% of premiums ceded by Chinese P&C insurers was assumed by reinsurance operations in China and regulated by CIRC. We will refer to these placements as Onshore business. The remainder was assumed by reinsurance operations outside of China. We will refer to these placements as Offshore business. China Re (Group) remains the dominant carrier for Onshore P&C reinsurance business, holding a c. 50% market share in 2011 (down from 55% in 2010) Since 2005 the CIRC has modified many of the domestic reinsurance rules including the phasing out of compulsory sessions. As a result, the Chinese reinsurance market is now more accessible to foreign insurers, albeit cultural issues, relationships and licensing requirements continue to present significant barriers to entry. Figure 19: Reinsurance Market Share Movements 100% 80% 60% 40% 20% 0 China Re (Group) Consolidated Hanover Re 2008 SCOR 2009 Munich Re Lloyd s (China) 2010 Swiss Re 2011 Sources: The 2012 Yearbook of China s Insurance, Inpoint 16

17 Aon Benfield Reflecting the underlying insurance market, Motor represents the largest part of Onshore reinsurance business. Figure 20: Reinsurance Premiums Assumed in China (2011) Motor Figure 21: Facultative Premium Assumed in China (2011) Property MAT 11% Liability 5% Other 6% 4% 1% 3% Property MAT Liability PA & H 27% 57% 20% 66% Other Sources: Company Reports, The 2012 Yearbook of China s Insurance, Inpoint Sources: Company Reports, The 2012 Yearbook of China s Insurance, Inpoint Treaty placements represent the bulk of Onshore business. The split by class for Onshore Treaty business is very similar to the overall Onshore split by class (i.e. dominated by Motor). However, the Onshore Facultative business split by class is biased towards Property. Offshore Business It is estimated that most Offshore business is assumed by reinsurance companies based in the Asia Pacific region, particularly Singapore, while European and London based reinsurers continue to participate. Offshore business has exhibited a c. 60%/40% Treaty/Facultative split over the last 3 years. Figure 22: Chinese Offshore P&C Reinsurance Premiums Treaty Fac 100% 80% 60% RMB 40% 20% 0% Sources: The 2011 Yearbook of China s Insurance, Inpoint

18 China P&C Insurance and Reinsurance Market Report Profitability Overall profitability of Chinese reinsurance programmes is challenging to analyse. As a proxy for loss performance, we have aggregated reinsurance recoveries reported to the CIRC by Chinese P&C insurance companies and compared these to aggregate premiums ceded. In absolute terms, aggregate recoveries have been falling since Figure 23: P&C Reinsurance: Premiums & Recoveries Figure 24: P&C Reinsurance. Premiums & Onshore Recoveries RMB 60b 50b 40b 30b 20b 10b Total Onshore Offshore Onshore Recoveries 60b Total Treaty Fac Recov s 0b b Sources: The 2011 Yearbook of China s Insurance, Inpoint RMB 40b 30b 20b Figure 25: P&C Treaty Reins. Premiums & Onshore Recoveries 50b Onshore Offshore Onshore Recoveries 10b 40b 0b Sources: The 2011 Yearbook of China s Insurance, Inpoint RMB 30b 20b Again, as a proxy for Onshore business loss performance, we have aggregated P&C paid claims reported to CIRC by reinsurers operating in China. Unsurprisingly, loss experience for Onshore Facultative business has been more favorable than for Treaty business. 10b 0b Sources: The 2011 Yearbook of China s Insurance, Inpoint Figure 26: P&C Fac Reins. Premiums & Onshore Claims Ratio b Onshore Offshore Onshore Claims Ratio 30% 6b 25% RMB 5b 4b 3b 20% 15% CR 2b 10% 1b 5% 0b Note: CR s compare gross premiums and paid claims Sources: The 2011 Yearbook of China s Insurance, Inpoint % 18

19 Aon Benfield Pricing and Coverage Following the spate of recent events in the Asia Pacific (APAC) region, there was immediate expectation that reinsurance pricing would rise markedly. At this point in time, the industry feels that this has already been reflected within the most recent renewals, with prices hardening mainly for those portfolios which had experiencing losses. Regardless, even those that have changed have not moved materially, with Catastrophe (CAT) XoL Treaty prices for example not changing greatly, despite several major international CAT losses in the first half of Other than the CAT events, the overall spend increases that have eventuated can be traced back to continuously increasing exposures and fast growing premium income. In summary, although the downward price movement of the last six to eight years throughout APAC has steadied, there has not been the anticipated backlash in Chinese risk pricing that has been witnessed in many other countries throughout the region. Reinsurers continue to show interest in China with ample capacity available in both the Non-Proportional and Proportional programs. Due to the positive performance of Non-Marine Proportional Treaty business in 2009 and 2010, the renewal terms and conditions are more or less the same or slightly improved. Coverage requested by cedents is largely unchanged with only a few Marine related clauses (such as Sanction Clauses) introduced by reinsurers. Distribution Although brokers place c. 30% of reinsurance business, in monetary terms, this amount is relatively small. Motor risk is largely retained. With the exception of specialist classes such as Aviation, most reinsurance placed outside of China goes to Asian markets by brokers operating out of Hong Kong or Singapore. The leading reinsurance brokers for Chinese business are Guy Carpenter, Aon Benfield (Aon-COFCO) and Willis Re. There are an increasing number of Treaty reinsurers in Singapore writing Chinese business. A sizeable amount of Proportional business flows to Singapore (in 2009; 3.2b RMB, or 466m USD) and this will increase due to organic growth and given that business no longer flows to Bermuda. Lloyd s China Lloyd s established a Chinese Non-Life reinsurance business in March In 2010, total reinsurance business ceded from Chinese insurers to Lloyd s was predominantly Marine (c. 35%), Property (31%) and Aviation (19%), with c. 83% written through Proportional Treaties. Lloyd s China represented 21% of the premium ceded by Chinese insurers to Lloyd s in 2010, up from 5% in For the nine months to September 2011, the Lloyd s China business had written 372m RMB (57.9m USD) in Chinese reinsurance business, a 26% lift on the prior year. 19

20 China P&C Insurance and Reinsurance Market Report Figure 27: Lloyd s Reins. Business Ceded from China RMB 2000m 1500m 1000m 500m 0m Lloyd s China 2008 Sources: Lloyd s, Inpoint Lloyd s Outside China In May 2010 the CIRC broadened Lloyd s local reinsurance license to include Non-Life insurance. Lloyd s issued its first direct insurance policy in China in September Over the immediate term, Lloyd s China s four managing agents (Travelers, Starr, Sportscover and Navigators) are anticipated to write Directors & Officers, Marine Cargo and Sports Contingency insurance lines. Insurance Linked Securities Since insurance securitisation was pioneered in the mid-1990s, more than 45b USD (289b RMB) of propertyexposed risk has been transferred to the capital markets in the form of catastrophe bonds and sidecars. While various perils have been securitised, the Insurance Linked Securities (ILS) market largely maintains a niche focus on peak property risks, particularly U.S. hurricane risk. However, economic growth and demographic changes in China are expected to continue to increase take up rates for insurance products. Coupled with the prospect of continued catastrophic loss activity, this may have an impact on how peak exposure zones are defined in the future. The various structural options available for recovery under ILS products broadly fit into indemnity vs. nonindemnity types. Indemnity structures most closely resemble the traditional market ultimate net loss ( UNL ) cover and offer sponsors the ability to recover based on actual losses. ILS penetration into new markets such as China is often first accomplished via non-indemnity structures due to ease of transaction structure, ease of data collection and review, as well as more comfort and better pricing by investors with reliance on model output and independent risk analysis versus specific underwriting and diligence. For the immediate future, it is anticipated that penetration of ILS products for non peak exposure zones, including China, will continue to be at the margin. One key issue at the moment is that reinsurance coverage is competitive for Chinese insurers and reinsurers. Nonetheless, ILS markets have potential to provide cover to state governments, and governmentsponsored disaster schemes, without ready access to underlying exposure data. This protection is event-based and not property-based to protect infrastructure, uninsured risks and overall government solvency post catastrophic events. In China, an example of a potentially relevant ILS would be an event-based coverage for Typhoon risk. Finally, it is worth noting that that Chinese securities, tax and accounting standards have no explicit section relevant to ILS products in China and may not currently allow domestic companies to issue catastrophe bonds without some amendments. 20

21 Aon Benfield Lines of Business Motor Motor insurance lines accounted for 76% of the Chinese P&C insurance market in 2011 excluding PA & H, making it the largest individual line of business. The main influences upon growth in Motor insurance lines have been the fluctuating demand for vehicles, and in turn, the changing regulatory environment. In 2010, Motor insurance premiums grew over 40%, reaching 306b RMB (45b USD) and the claims ratio for the line fell to c. 46%. Figure 28: Motor Insurance: Premiums & Claims Ratio RMB 350b 300b 250b 200b 150b 100b 50b Premiums Claims Ratio 0b 40% Note: CR s compare gross premiums and paid claims Sources: CIRC, The 2012 Yearbook of China s Insurance, Inpoint The fluctuating number of vehicle sales in China has been the main contributor to the expansion of total Motor insurance premiums. Since 2002, the number of new passenger vehicle registrations has multiplied 5 fold. Regulatory changes have been the other main influencing factor on the growth of the Motor insurance market. Over the last decade, some of the most important were: The introduction of the compulsory vehicle insurance system (May 2004); 75% 70% 65% 60% 55% 50% 45% CR the Vehicle Purchase Tax for small cars was decreased from 10% (2008) to 5% (2009). This had the desired effect with total vehicle sales for the year ended December 2009 reaching 13m. This stimulus has since been reversed, with rates stepped back to 2008 levels (7.5% in 2010 and 10% in 2011). Amidst concerns that the incentives would not be extended, an avalanche of additional car sales eventuated. As such, 2010 vehicle sales were artificially inflated, hitting an all-time high of 18m for the year, or c. 33% year on year growth following c. 46% growth in Going into 2011, additional factors influenced the Chinese auto market. These included the increasingly stringent rules governing traffic, the ongoing trials to fully liberalize the premium rate for Commercial Motor insurance, the heightened restrictions on vehicle purchases in cities such as Beijing and the continuously expanding public transport system. Combined with the reversion of the Vehicle Purchase Tax, the growth of the prior two years will be difficult to repeat. Data published by the Civil Aviation Administration of China (CAAC) for the eight months to August 2011 recorded that passenger vehicle sales Year on year had risen only 6%, and commercial vehicle sales actually fell 4.8%, a net increase of 3.3%. Chinese auto production figures for the same period mirrored sales data. Each of these results has fallen well short of commentators forecasts. Despite the lower new car volumes, the Motor insurance market was able to achieve 14% growth for the first half of Figure 29: China s Vehicle Sales per Month and YoY Growth The insurer being required to compensate within the limit of the compulsory third party liability insurance when vehicles are involved in a traffic accident causing casualties or property losses (July 2006); and When the driver is not at fault, liability is capped at 10% (May 2008). However, the regulatory change causing the greatest short term impact on Chinese auto sales was the implementation of the Vehicle Purchase Tax. To stimulate vehicle sales during the 2008 financial crisis, Units 2.0m 1.6m 1.2m 0.8m 0.4m 0.0m Sources: CAAM, 2011 Chinese Statistical Yearbook, Inpoint With the momentum of vehicle sales slowing by 160% 120% 80% 40% 0% -40% Growth 21

22 China P&C Insurance and Reinsurance Market Report the month throughout 2011, and the seasonally low second and third quarters still to play out, the auto industry appears set for moderated growth for the 2011 year. Given Motor insurance is such a large portion of domestic insurance premiums, the Chinese P&C insurance market would be expected to encounter a similar moderation. Another impediment to the growth of the Chinese Motor insurance market is that compulsory classes of Motor insurance are excluded from China s WTO commitments. As a result, no foreign insurance companies are currently authorized to write Motor Third Party Liability (MTPL). However, the possibility remains that the CIRC may open MTPL to foreign insurers in future. In doing so, it is expected that this could lead to an improvement in the quality of risk management, a reduction of claims and some alleviation of solvency pressure for domestic insurers. As voluntary Motor business is normally packaged with compulsory MTPL, the clearing of this barrier would also allow foreign insurers to access more market share. Insurers have historically competed via excessive agency commissions, but these were brought under strict control in Leading insurers have since turned to developing direct business, particularly via their call centers. Commercial vehicles and car fleets represent the largest part of the Motor market. As in the private car market, all insurers use the same gross rate tariffs for commercial vehicles and fleets. The CIRC regulations require two policies to be issued for each vehicle in a fleet, one for compulsory MTPL and one for voluntary Motor. Fleet departments, therefore, require administration resources to issue policies. Insurers are not permitted to write nationwide programs unless they can demonstrate to the CIRC that they can offer a full service capability nationally. A bonus/malus system for compulsory MTPL was introduced in July This allows a discount of 10% for every year without a fault claim up to a maximum of 30% after three years. One fault claim in the previous year cancels the bonus, two fault claims earn a 10% malus loading, whilst a fault claim involving death carries a 30% loading. Currently, databases recording drivers accident histories only exist in a limited number of cities including Beijing and Shanghai, but the intention is to roll these out across the country. In June 2010, the CIRC introduced a pilot scheme in Shenzhen for the removal of tariffs for Motor policies so insurers are now allowed to use their own parameters to set premiums. The reform only covers Shenzhen Commercial Motor policies at this point and not compulsory Third-Party Liability policies. Statistics for the region show that average insurance premium fell by 4.6% between March and May. The average premium for Motor policies for individuals slid by 6% while that for group Motor policies declined by 3.6%. Small and medium sized insurers may find it challenging to implement flexible pricing that requires actuarial computations, operations management and IT system changes. As such, there is some risk that reforms in Motor insurance pricing will not proceed on schedule. There are a large number of insurers underwriting Motor policies, however the market is extremely concentrated, dominated by PICC, Ping An, China Pacific and China United who represent 72% of the market. The remaining 28% of the market is split between 37 companies with the majority of these underwriting premiums less than 1b RMB (0.1b USD). Despite the relative strength of PICC, its market share decreased by c. 2% in Figure 30: Motor Vehicle Insurance: Market Share (2011) 4% 4% 22% 14% 19% 38% 37% Sources: The 2012 Yearbook of China s Insurance, Inpoint PICC Ping An CPIC China United CLPC Others 22